Islamic/Muslim Mortgages

Islamic or Muslim mortgages are getting easier to find in the UK. With these mortgages, Muslims can now borrow money without breaking Islamic law. This makes it much easier for Muslims to buy a home while conforming to their beliefs.

The Need for Muslim Mortgages

According to Islamic law, Muslims are not allowed to pay interest on a loan. Because interest is not paid for goods or assets, it is considered a sinful form of exchanging money. Both the borrower and the lender would be sinning if interest were charged on a loan. Lenders can only make a profit if they offer goods or services, not just money.

However, high street UK lenders will not lend money for a property without charging interest. This has forced many Muslims living in Britain to rent, rather than own their own property, if they want to stay compliant with the Islamic law. However, with a little creativity, Muslim mortgages allow both borrowers and lenders to be in compliance with Islamic law, allowing Muslims to buy their own properties. There are two basic ways to do this.

Murabaha Mortgages

Murabaha mortgages are the less popular of the two types of Islamic mortgages. These are short-term mortgages, with the longest repayment term typically being 15 years. They require a large down payment and monthly payment for the property.

In a Murabaha structure, the homebuyer will approach the lender with the deposit for the property, usually 20% or more of the value of the home. The lender buys the property, and then sells it to the buyer for a higher price. The buyer will then make monthly payments to pay for the property. Instead of charging interest, the lender makes money on the difference between the price paid for the property and the price at which it is resold to the actual buyer.

Ijara Mortgages

Ijara mortgages are more popular. They require less of a down payment and a lower monthly payment. With this type of Muslim mortgage, you will choose a property and present it to the lender. The lender will purchase the property from the seller for you, and then rent it to you in a rent-to-own structure. You will also make repayment payments each month. The rent payments are the profit the lender makes, and the repayment payments allow you to own the property at the end of the agreement. The rent payments decrease annually as you pay back more and more of the property’s actual cost.

Either of these Islamic mortgages works in compliance with the law. If you wish to own your property quickly and have a lot of working capital at the outset of the arrangement, you may benefit from a Murabaha mortgage. Otherwise, an Ijara mortgage will allow you to own the property in around 25 years with affordable monthly payments and a lower, 10% deposit on the property.